Guide to Israeli Regulatory Compliance

fforr Offffshorre Trrusttees off IIsrraellii Affffectted Trrustts,, o O sho e T us ees o s ae A ec ed T us s Offffshorre Porrttffolliio Managerrs & Custtodiians & Banks O sho e Po o o Manage s & Cus od ans & Banks wiitth IIsrraellii based clliientts w h s ae based c en s Prepared for clients and prospective clients of Anglo Capital Limited.

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Financial Solutions Life Solutions

This Guide was produced by Anglo Capital Limited Sponsor : STEP Israel Annual Conference 2012 and distributed at the STEP Israel Annual Conference 2012
Tel Aviv (29th & 30th May 2012)

Guide to Israeli Regulatory Compliance For Offshore Trustees of Israeli Affected Trusts, Offshore Portfolio Managers, Custodians & Banks with Israeli based clients.
A summary of Israeli information
The information in this book is based on our understanding of Israeli law, legislative proposals and current practice as at May 2012. Translations made from any Hebrew document are not binding, and the original Hebrew document should be referred to. This guide is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining the liability to tax or legal opinion in specific circumstances. In such instances, separate advice should be taken.

This document can also be found on the Anglo Capital Limited website at: www.anglocapital.com & Philip Braude Investment Marketer website at: www.philipbraude.com Anglo Capital Limited, Israel. Contact Details: Philip Braude

AICPA International Affiliate (US) Chartered Certified Accountant (UK) Personal Financial Planner: AICPA (US) Chartered Fellow of the Chartered Institute of Securities & Investment Institute (UK) Trust & Estate Practitioner (UK) Ex-Officio Chairman : Jerusalem Branch Investment Marketer Licensed by the Israel Securities Authority

Tel: +972-2-992 1519 Fax: +972-2-991 6901 Hayarden Boulevard 120/10, Ramat Beit Shemesh, Israel P.O. Box 90064, Ramat Beit Shemesh, 99190, Israel pbraude@anglocapital.com

www.anglocapital.com & philipbraude.com

_______________________________________________________________________________________________________ This guide is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining the liability to tax or legal opinion in specific circumstances. In such instances, separate advice should be taken.

Table of contents
Investment Counseling Regulatory Supervision.. Territorial Application ... Investment Counseling Portfolio Management Investment Marketing .. Activities that do not require a license .. Investment Counseling services provided out of Israel by a non-licensed person ....................... Sophisticated Clients Definitions ...................... Logic behind Sophisticated Client Category ... Sophisticated Client Declaration . Can a non-licensed person, working for a licensed entity provide service to a Sophisticated Client? Calculation of net worth to determine Sophisticated Client status ... Inclusion of bank loans and deposits in the calculation of net worth to determine Sophisticated Client status Inclusion of encumbered assets in the calculation of net worth to determine Sophisticated Client status Family unit to be viewed as Sophisticated Client . Family members holding a joint investment account...................... Inclusion of assets held in a private company in the calculation of net worth to determine status .. Determination of status of corporation owned by Sophisticated Client shareholders ............................................ Determination of status of Limited Partnership as Sophisticated Client . Need to obtain Sophisticated Clients confirmation prior to each activity .. Determination of status of Trust as Sophisticated Client .. Practical Strategies in Ensuring Israeli Regulatory Compliance by Israeli Affected Trusts Definition of Israeli Affected Trusts Method for Investment Counseling Services to be provided to An Israeli Affected Trust out of Israel by a non-licensed person .. Caution as regards communicating with settlors or beneficiaries of Offshore Trusts that are located in Israel Strategies identified to avoid the need for Israeli Regulatory Compliance Strategies identified to comply with Israeli Regulatory Compliance . Providing Israeli Regulatory Compliance for your Israeli clients 4 4 5 5 5 6 7 8 9 9 10 10 10 10 11 11 11 12 12 12 13 14 14 14 15 15

Page

_______________________________________________________________________________________________________ This guide is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining the liability to tax or legal opinion in specific circumstances. In such instances, separate advice should be taken.

Investment Counseling
Regulatory Supervision The Israel Securities Authority is the supervisory body enacted under law to supervise the financial services industry in Israel. It maintains a comprehensive website (www.isa.gov.il), which contains the current versions of enacted laws, regulations and opinions that they issue from time to time. Territorial Application In an opinion letter 1 the Israel Securities Authority stated that the application of the Israeli Investment Counselling, Investment Marketing and Portfolio Management Law is territorial. That is to say that the provision of any Investment Counseling activities within the borders of Israel requires a license under the regulations of the law, unless the activity is specifically exempt by law from requiring a license.

_______________________________________________________________________________________________________ This guide is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining the liability to tax or legal opinion in specific circumstances. In such instances, separate advice should be taken.

ISA Investment Division letter dated 27th January 2011(http://www.isa.gov.il/Download/IsaFile_5484.pdf)

Investment Counseling The definition of Investment Counseling 2 is giving advice to others on the profitability of an investment, of holding, acquiring, or selling securities or financial assets: for this purpose, advice whether direct or indirect, including by means of advertising, in circulars, in professional opinions, by use of mail, facsimile or any other medium a. No person shall engage in investment counseling, unless he holds a counseling license. 3 b. An individual who holds a counseling license may engage in investment counseling either as an individual or as an employee of a company that has a counseling license, or has a portfolio managers license, and also engages in counseling. 4 Portfolio Management Portfolio management is provided by a person engaged in the management of investment portfolios. 5 a. No person shall engage in investment portfolio management unless he holds a portfolio managers license, and if he is an individual if he holds a license and is an employee of a company that holds a portfolio managers license. 6 Investment Marketing An Investment Marketer 7 is someone who provides advice to others on the profitability of an investment; of holding; acquiring or selling securities or financial assets, and when he has a Connection to the financial asset. 8 a. No person shall engage in investment marketing unless he holds an investment marketing license. 9 b. An individual investment marketing license holder may engage in investment marketing as an individual, or as an employee of a company that holds an investment marketing license, or that holds a portfolio management license and also engages in investment marketing. 10

Israeli Investment Counseling, Investment Marketing and Portfolio Management Law (2011) Definition of investment counseling 3 Israeli Investment Counseling, Investment Marketing and Portfolio Management Law (2011) s2(a) 4 Israeli Investment Counseling, Investment Marketing and Portfolio Management Law (2011) s2(a) 5 Israeli Investment Counseling, Investment Marketing and Portfolio Management Law (2011) Definition of portfolio manager 6 Israeli Investment Counseling, Investment Marketing and Portfolio Management Law (2011) s2(b) 7 ISA Questions and Answers (http://www.isa.gov.il/Default.aspx?Site=YOATZIM&ID=2932,1348) 8 Israeli Investment Counseling, Investment Marketing and Portfolio Management Law (2011) Definition of investment marketer 9 Israeli Investment Counseling, Investment Marketing and Portfolio Management Law (2011) s2(b1) 10 Israeli Investment Counseling, Investment Marketing and Portfolio Management Law (2011) s2(b1)
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_______________________________________________________________________________________________________ This guide is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining the liability to tax or legal opinion in specific circumstances. In such instances, separate advice should be taken.

Activities that do not require a license The following activities do not require a license: a. Investment counseling or portfolio management for not more than five clients per calendar year by an individual who does not engage in investment counseling or portfolio management as part of a licensed body corporate or of a banking corporation. 11 i. This exemption is restricted to 5 clients per calendar year, not 5 clients at any specific time. 12 ii. This exemption is only granted to an individual and not to a corporation. 13 b. Investment counseling or investment marketing that a person provides only to a corporation by virtue of his membership in the investment committee or in the Board of Directors of that corporation, in the performance of his duty as member of a committee or of Board of Directors, as the case may be.14 c. Managing the investment portfolio of a body corporate, by a person who does that as part of his duties in that body corporate or in a body corporate affiliated to that body corporate. 15 d. Investment counseling or portfolio management for a relative. 16 i. A grandchild is considered a relative for the purposes of this exemption. 17 e. Investment counseling or portfolio management by an auditor, attorney at law or tax consultant, in conjunction with the service provided to his client within the said professional sphere. 18 f. Investment portfolio management by a person appointed by order of a competent court or tribunal to deal with another persons assets in the course of exercising his responsibility. 19 g. Investment counselling, investment marketing or portfolio 20 management for Qualified / Sophisticated Clients. i. Please refer to the section below dealing with this topic in greater detail. h. Prospecting of Israeli Resident clients for provision of Investment Counselling Services provided out of Israel i. In an opinion letter, 21 the Israel Securities Authority states that the prospecting, or attempt to prospect clients located in Israel in order to provide Investment Counseling services outside of Israel by someone who is not licensed in Israel to provide Investment Counseling Services is a prohibited activity.

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Israeli Investment Counseling, Investment Marketing and Portfolio Management Law (2011) s3(a)(3) ISA Licensing Division letter dated 15th September 2005 (http://www.isa.gov.il/Download/IsaFile_222.pdf) 13 ISA Licensing Division letter dated 15th September 2005 (http://www.isa.gov.il/Download/IsaFile_222.pdf) 14 Israeli Investment Counseling, Investment Marketing and Portfolio Management Law (2011) s3(a)(5) 15 Israeli Investment Counseling, Investment Marketing and Portfolio Management Law (2011) s3(a)(6) 16 Israeli Investment Counseling, Investment Marketing and Portfolio Management Law (2011) s3(a)(7) 17 ISA Question & Answer dated 10th October 2011 (http://www.isa.gov.il/Default.aspx?Site=YOATZIM&ID=2932,4101) 18 Israeli Investment Counseling, Investment Marketing and Portfolio Management Law (2011) s3(a)(9) 19 Israeli Investment Counseling, Investment Marketing and Portfolio Management Law (2011) s3(a)(10) 20 Israeli Investment Counseling, Investment Marketing and Portfolio Management Law (2011) s3(a)(11) 21 ISA Investment Division letter dated 27th January 2011 (http:// www.isa.gov.il/Download/IsaFile_5484.pdf)

_______________________________________________________________________________________________________ This guide is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining the liability to tax or legal opinion in specific circumstances. In such instances, separate advice should be taken.

Investment Counseling Services provided out of Israel by a non-licensed person In an opinion letter 22 the Israel Securities Authority stated that investment counseling activities may be provided outside of Israel to clients located in Israel by a non-licensed person if the following conditions all apply: i. The person providing the investment counseling service must be not be physically located in Israel, and ii. The person providing the investment counseling service must be living outside of Israel on a permanent basis, and iii. The communication involved in the provision of the investment counseling service was performed outside of Israel In a Question & Answer appearing on the Israel Security Authoritys website 23 the following opinion of the Israel Securities Authority was stated: The obligation of licensing is applicable even in the case where part of the Investment Counseling Service is provided in Israel. In conjunction with this fact, the provisions of the law on providing Investment Counseling Service from outside Israel to a client in Israel is allowed if all of the following conditions apply: a. The business connection was established outside of Israel, or the relationship was established on the initiative of the client without the service provider attempting to prospect clients in Israel, and b. The investment account is managed out of Israel, and c. No actual meetings occur in Israel Editors Note: From a practical standpoint, all 6 conditions should be applied to ensure that a non-Israeli non-licensed person does not contravene the provisions of the Israeli law in the provision of Investment Counseling Services to clients located in Israel. Referral to a Portfolio Manager deemed Investment Counseling In a draft directive 24 dealing with the referral of a client to an Portfolio Manager, The Israel Securities Authority clearly took the view that such an act is Investment Counseling, and requires the person who performs this act to either hold an Investment Advisors License or Investment Marketers License. Specific conditions are imposed in order to comply with the provisions of the law in such a case.

22 23

ISA Investment Division letter dated 27th January 2011 (http://www.isa.gov.il/Download/IsaFile_5484.pdf) ISA Question & Answer dated 10th October 2011 (http://www.isa.gov.il/Default.aspx?Site=YOATZIM&ID=2932,4101) 24 ISA - Draft Directive Directive to Licensed Advisors and Licensed Marketers in the matter of referring clients for Portfolio Management Services which was open for comment until 1 st May 2011

_______________________________________________________________________________________________________ This guide is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining the liability to tax or legal opinion in specific circumstances. In such instances, separate advice should be taken.

Sophisticated Clients

Definitions The concept of a Sophisticated Client is defined as a client for whom Investment Counseling services can be provided without the need for the service provider to be licensed. 25 The following definitions of a Sophisticated Client were promulgated 26: a. A mutual Investment Fund, or Fund Manager b. A pension fund c. An insurer d. A banking corporation e. A license holder f. A member of the Stock Exchange g. An underwriter h. A corporation whose Hon Atzmi Share Capital & Reserves are greater than NIS 50 million (Note: this figure must be indexed to the Israeli CPI). a. NIS 50 million at current forex rates equates to US$13 million i. An individual who fulfills two of the following conditions, and confirms in writing in advance of any Investment Counseling services to be provided, that he qualifies as a Sophisticated Client: a. Conditions to be fulfilled: i. Net worth of his cash, deposits, financial assets and financial securities (as defined in s52 of the Financial Securities Law), that is in his ownership, exceeds NIS 12 million (Note: this figure must be indexed to the Israeli CPI). 1. NIS 12 million at current forex rates equates to US$3.16 million 2. The definition excludes his residential property, and seems to exclude other non-liquid assets such as investment properties ii. He has expertise and proven abilities in the financial markets, or has experience of at least one year in a professional position that requires expertise in the financial markets iii. He has transacted at least 30 transactions, on average, every quarter for the last four quarters before he gave his consent to be considered a Sophisticated Client. For this purpose, a transaction excludes a transaction that was executed by a Portfolio Manager on his behalf by a Portfolio Manager that was connected to him by means of a Portfolio Management Agreement. j. A corporation which is fully owned by investors who qualify with one of the definitions above k. A foreign corporation incorporated out of Israel, and where the characteristics of its activities are similar to a corporation described above

25 26

Israeli Investment Counseling, Investment Marketing and Portfolio Management Law (2011) s3(11) Amendment No 13 to the Israeli Investment Counseling, Investment Marketing and Portfolio Management Law, that was promulgated 16th February 2010. Refer pg. 378 of Sefer Hachukim # 2229

_______________________________________________________________________________________________________ This guide is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining the liability to tax or legal opinion in specific circumstances. In such instances, separate advice should be taken.

Sophisticated Clients contd

Clarifications provided by Israel Securities Authority a. Logic behind Sophisticated Client category In a Q&A sheet issued by the Israel Securities Authority 27 explained that the logic behind the Sophisticated Client category arose from the understanding of the legislator that the Sophisticated Client is a wise investor, and does not require the protection afforded by the provisions of the law. b. Sophisticated Client Declaration The Israel Securities Authority was asked if there was a standard Sophisticated Client Declaration form, and responded 28 that the law does not prescribe the information and the documentation that is required in order to classify a client as a Sophisticated Client. The person providing the service has to detail the procedures that he will follow in his Work Procedures Manual, in order to satisfy his conclusion, that he has confirmed the fact that he is servicing a Sophisticated Client. i. Editors note : It is reasonable to assume that the client signing the Sophisticated Client Declaration, would have to provide external evidence as to the assertions he is making, in order for the service provider to rely on his declaration, should he be questioned in this regard by the regulator. ii. Editors note : The service provide needs to apply logic to the situation, and should question an unreasonable confirmation made by the client, if he would want the Sophisticated Client Declaration to be accepted by the regulator. Examples to illustrate the point a. In the case of a client signing the Sophisticated Client Declaration, and requesting a relatively small account to be managed, the service provider should obtain external evidence as to the existence of the required net worth owned by the client exceeding the required minimum. b. In the case of a client signing the Sophisticated Client Declaration, and requesting a joint family account to be managed, the service provider should obtain external evidence as to the existence of the required net worth owned by the client exceeding the required minimum. c. In the case of an elderly widow client who does not have an email account signing the Sophisticated Client Declaration, and confirming that she has performed an average of 30 trades per quarter for the last four quarters, the service provider should confirm the accuracy of this declaration by the obtaining of external documentation. d. In the case of a client signing the Sophisticated Client Declaration, and declaring that assets he might have owned which have subsequently been settled into a trust, the service provider should obtain external evidence as to the existence of the required net worth owned by the client exceeding the required minimum.

27 28

_______________________________________________________________________________________________________ This guide is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining the liability to tax or legal opinion in specific circumstances. In such instances, separate advice should be taken.

ISA Legal Division Q&A Sheet # 103-27 dated 17th April 2012 ISA Question & Answer dated 1st August 2011 (http://www.isa.gov.il/Default.aspx?Site=YOATZIM&ID=2932,4101)

Sophisticated Clients contd

c. Can a non-licensed person, working for a licensed entity, provide service to a Sophisticated Client? The Israel Securities Authority dealt with this issue 29, and confirmed that the provision of Investment Counseling services to a Sophisticated Client does not require the provider of the service to hold a license. However, under the provisions of the law 30, one of the conditions of licensing provided to a corporate Investment Advisor, Investment Marketer or Portfolio Manager is that all persons who will provide Investment Counseling services in the licensed corporations name will be its employees who hold the appropriate licenses. Accordingly a licensed entity is not allowed to provide Investment Counseling services via a non-licensed employee, even when the provision of such a service does not require the individual to be licensed (such as in the case of providing Investment Counseling services to a Sophisticated Client.) Accordingly, a licensed entity can only service a Sophisticated Client by use of a licensed employee only. d. Calculation of net worth to determine Sophisticated Client Status The Legal Division of the Israel Securities authority has indicated that 31 the value of shares is calculated by reference to their market value, assuming that the shares are traded and there is a market for them. In the absence of a market and the trading of the shares, the Legal Division of the Israel Securities Authority would need to be consulted on an ad-hoc basis. e. Inclusion of bank loans and deposits in the calculation of net worth to determine Sophisticated Client status The Legal Division of the Israel Securities authority has indicated that 32 bank deposits may only be included in the calculation of net worth to determine Sophisticated Client status if they are unencumbered and not pledged against any liability. Furthermore, they consider the taking of loans to generate cash to be included in the calculation of net worth to determine Sophisticated Client status as a sidestepping of the provisions of the law, and would not be included in the calculation of net worth to determine Sophisticated Client status. f. Inclusion of encumbered assets in the calculation of net worth to determine Sophisticated Client status The Legal Division of the Israel Securities authority has indicated that 33 only assets with a high level of liquidity may be included in the calculation of net worth to determine Sophisticated Client status. Accordingly encumbered assets may only be included in this calculation if they have a high level of liquidity.

29 30

ISA Question & Answer undated (http://www.isa.gov.il/Default.aspx?Site=YOATZIM&ID=2932,4101) Israeli Investment Counseling, Investment Marketing and Portfolio Management Law (2011) s7(c)(1) & s8(b)(2) 31 ISA Legal Division Q&A Sheet # 103-27 dated 17th April 2012. Ref Q&A # 1 32 ISA Legal Division Q&A Sheet # 103-27 dated 17th April 2012. Ref Q&A # 2 33 ISA Legal Division Q&A Sheet # 103-27 dated 17th April 2012. Ref Q&A # 3

_______________________________________________________________________________________________________ This guide is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining the liability to tax or legal opinion in specific circumstances. In such instances, separate advice should be taken.

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Sophisticated Clients contd

g. Family Unit to be viewed as Sophisticated Client The Legal Division of the Israel Securities Authority has indicated that 34 a family unit (spouses, parents and children) may be viewed as one unit for the determination of their status as a Sophisticated Client, as long as they are living together or supporting each other financially. h. Family members holding a joint investment account In response to a question asked, the Investment Division of the Israel Securities Authority 35 dealt with the issue of the status of family members when considering the wealth held by the family unit, and made the following observations: i. Spouses who hold a joint account together as a family unit will be considered as one joint entity. In such a case, if one of the spouses qualifies as a Sophisticated Client according to the provisions of the law, then the other spouse will be similarly recognized as a Sophisticated Client, as regards this account. ii. In the case where a parent and child are both registered as joint owners in an investment account, they are not considered as a family unit. In such a case, they can each take their respective percentage holdings of the value of this investment account into account in their calculation of assets towards the calculation of qualification as a Sophisticated Client. 1. In the case where an agreement has been entered into that defines their respective percentage holdings of the account, such percentages may be applied to their ownership value. 2. In the case where no agreement has been entered into that defines their respective percentage holdings, then the respective value that they can take into account in their calculation of assets towards the calculation of qualification as a Sophisticated Client would be proportional to the number of joint account owners. For example, in a case where there are two joint account owners, they can each take 50% of the value of the investment account into account in their calculation of assets towards the calculation of qualification as a Sophisticated Client. i. Inclusion of assets held in a private company in the calculation of net worth to determine Sophisticated Client status The Legal Division of the Israel Securities Authority has indicated that 36 the Hon Atzmai Capital Worth of a private company held may be included in the calculation of net worth to determine Sophisticated Client status. This will be done in reference to the specific percentage shareholding the clients hold, as well as referencing the audited financial statements of the underlying company.

34 35

ISA Legal Division Q&A Sheet # 103-27 dated 17th April 2012. Ref Q&A # 4 ISA Investment Division letter dated 15th February 2011 (http://www.isa.gov.il/Download/IsaFile_5541.pdf) 36 ISA Legal Division Q&A Sheet # 103-27 dated 17th April 2012. Ref Q&A # 5

_______________________________________________________________________________________________________ This guide is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining the liability to tax or legal opinion in specific circumstances. In such instances, separate advice should be taken.

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Sophisticated Clients contd

j. Determination of status of corporation owned by Sophisticated Client shareholders The Legal Division of the Israel Securities authority has indicated that 37 corporate entity will be considered a Sophisticated Client 38 if it is 100% owned by shareholders that themselves qualify in the definition of a Sophisticated Client, and their ownership was acquired for their own purposes. i. Editors note : The situation of group structures would seem to be problematic in this regard.

k. Determination of status of Limited Partnership as Sophisticated Client The Legal Division of the Israel Securities authority has indicated that 39 a Limited Partnership with the General Partner qualifying as a Sophisticated Client will be only be considered a Sophisticated Client if all the partners of the Limited Partnership themselves qualify as Sophisticated Clients in their own rights. l. Need to obtain Sophisticated Clients confirmation prior to each activity The Legal Division of the Israel Securities authority has indicated that 40 a nonlicensed person providing Investment Counseling services to a qualifying Sophisticated Client is required to obtain his prior written confirmation that he qualifies as Sophisticated Client before the provision of each service. i. Editors note : This understanding would require a non-licensed Portfolio Manager providing Portfolio Management services to a Sophisticated Client to obtain a new Sophisticated Client declaration before each trade that is performed on behalf of the client.

37 38

ISA Legal Division Q&A Sheet # 103-27 dated 17th April 2012. Ref Q&A # 6 Amendment No 13 to the Israeli Investment Counseling, Investment Marketing and Portfolio Management Law, that was promulgated 16th February 2010. Refer pg. 378 of Sefer Hachukim # 2229. Clause 10. 39 ISA Legal Division Q&A Sheet # 103-27 dated 17th April 2012. Ref Q&A # 7 40 ISA Legal Division Q&A Sheet # 103-27 dated 17th April 2012. Ref Introduction

_______________________________________________________________________________________________________ This guide is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining the liability to tax or legal opinion in specific circumstances. In such instances, separate advice should be taken.

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Sophisticated Clients contd

m. Determination of status of Trust as Sophisticated Client The Investment Division of the Israel Securities Authority dealt with the issue of the determination of a Trust as a Sophisticated Client. 41 In its response, the Israel Securities Authority stated: i. A trustee is responsible to act in the best interests of the trust 42, and is responsible for damages caused by breach of his fiduciary duties 43. The trustee would be the party to choose a licensed or non-licensed advisor, and be the party to sign the Sophisticated Client declaration. ii. The settlor is not to be considered as the relevant party in determining the Sophisticated Client status of the trust, as he has cut his ties with the settled assets once they were settled onto the trust. Accordingly, his status bears no relevance in determining the Sophisticated Client status of the trust, but only that of the trustee. iii. Accordingly, they are of the view that the trustee of the trust is the party to be considered as the Sophisticated Client in the case of a trust. a. Editors note: An individual trustee must pass 2 of the 3 tests in his own right to determine his eligibility to be considered a Sophisticated Client. It does not appear that the assets of the trust would be included in the calculation to determine his net worth. b. Editors note: A corporate trustee must pass the tests applied to a corporate entity to be considered a Sophisticated Client, namely: i. Have Hon Atzmai : Share Capital & Reserves greater than NIS 50 million, or ii. All its shareholders must be able to qualify as Sophisticated Investors in their own rights.

41 42

ISA Investment Division letter dated 27th February 2011 (http://www.isa.gov.il/Download/IsaFile_5577.pdf) Israeli Trust Law 1979. Refer s 10 43 Israeli Trust Law 1979. Refer s 12

_______________________________________________________________________________________________________ This guide is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining the liability to tax or legal opinion in specific circumstances. In such instances, separate advice should be taken.

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Practical Strategies in Ensuring Israeli Regulatory Compliance by Israeli Affected Trusts

Definition of Israeli Affected Trusts An Israeli Affected Trust includes the following, which have a physical connection to Israel: i. A trust located in Israel ii. An offshore trust which has a settlor located in Israel iii. An offshore trust which has a beneficiary located in Israel Method for Investment Counseling Services to be provided to an Israeli Affected Trust out of Israel by a non-licensed person As detailed in the section above entitled Investment Counseling Services provided out of Israel by a non-licensed person, the following 6 conditions were identified to ensure that there is no Israeli Regulatory Compliance exposure due to the providing of the Investment Counseling services: i. The person providing the investment counseling service must be not be physically located in Israel, and ii. The person providing the investment counseling service must be living outside of Israel on a permanent basis, and iii. The communication involved in the provision of the investment counseling service was performed outside of Israel iv. The business connection was established outside of Israel, or the relationship was established on the initiative of the client without the service provider attempting to prospect clients in Israel, and v. The investment account is managed out of Israel, and vi. No actual meetings occur in Israel If any of the above conditions were violated and part of the Investment Counseling service is provided in Israel, then the obligation of licensing is applicable, and the various provisions of the Israeli law apply to the providing of the Investment Counseling service. Caution as regards communicating with settlors or beneficiaries of Offshore Trusts that are located in Israel Caution is expressed in the case of non-Israeli trustees and investment professionals liaising & communicating Investment Counseling matters with settlors and beneficiaries of offshore trusts who are located in Israel. We have expressed the view that the trustee is the relevant party to be considered in complying with the Sophisticated Client requirements on behalf of the trust. However, to any extent which the providing of Investment Counseling services may be viewed as also, directly or indirectly, being provided to the Israeli settlor or beneficiary, then the Israeli Regulatory Compliance obligations towards the individual settlor or beneficiary may be required as regards this element of the service. This approach is a conservative approach, which would protect all parties concerned.

_______________________________________________________________________________________________________ This guide is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining the liability to tax or legal opinion in specific circumstances. In such instances, separate advice should be taken.

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Practical Strategies in Ensuring Israeli Regulatory Compliance by Israeli affected Trusts contd
Strategies identified to avoid the need for Israeli Regulatory Compliance i. Terminate the client relationship ii. Ensure that no Investment Counseling is provided in Israel either directly or indirectly iii. Obtain a Sophisticated Client Declaration from the client before each transaction is performed Strategies identified to comply with Israeli Regulatory Compliance i. Register as a Licensed Portfolio Manager or Investment Advisor or Investment Marketer in Israel ii. Obtain Israeli Regulatory Compliance Services from a Licensed Investment Marketer

_______________________________________________________________________________________________________ This guide is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining the liability to tax or legal opinion in specific circumstances. In such instances, separate advice should be taken.

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Providing Israeli Regulatory Compliance for your Israeli Clients

Israeli law limits the ability of foreign financial institutions and portfolio managers which are not regulated by the Israel Securities Authority to manage investments for residents of Israel. Foreign trustees, banks and portfolio managers who service Israeli resident clients need to take one of the following steps to ensure compliance with Israeli regulatory legislation: Avoiding the Need for Israeli Regulatory Compliance: a) By terminating the client relationship b) By ensuring that they do not provide investment advice either directly or indirectly within Israel c) By obtaining a Sophisticated Client Declaration from the client before each transaction is performed Ensuring Israeli Regulatory Compliance: d) By registering as a Licensed Portfolio Manager, Investment Advisor or Investment Marketer in Israel e) By obtaining Israeli Regulatory Compliance Services from a Licensed Investment Marketer. Philip Braude (Investment Marketer) can assist foreign trustees, banks and portfolio managers who are servicing Israeli-resident clients to outsource the Israeli regulatory compliance function. This will enable foreign institutions to maintain existing business relationships with their Israeli resident clients, and continue to service the assets under their management in their home jurisdiction.

_______________________________________________________________________________________________________ This guide is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining the liability to tax or legal opinion in specific circumstances. In such instances, separate advice should be taken.

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